Dungarvan, the coastal town in Co Waterford with a population of fewer than 10,000 people, is about to lose one of its most successful indigenous companies.

LeT Systems, a software firm founded by local entrepreneur Mr James Hyland, plans to move its operation and 52 local staff to Cork before the end of the year.

Access to the airport, the lure of a cluster of technology firms and the availability of skilled personnel are all factors that have led the firm - which relocated to Dungarvan from the UK in the late 1990s - to move to the State's second city.

"We took a scientific look at where we should be located and decided Cork offered the best infrastructure," says LeT System's chief executive Mr Fionan Murray, who is keen to write a glowing reference for Dungarvan despite his decision to relocate.

Rapid sales growth over the past three years as the firm expands into Asia and the US means air transport is increasingly important for LeT Systems.

The company has also found that cities such as Cork tend to attract people with the best software skills. "If you want to hire software guys at the top of their game and have good international experience, they are usually in their late 20s and want to live in a city," says Mr Murray.

LeT Systems experience is reflected across the technology sector, which tends to be underepresented in regional areas.

Software development in particular is heavily focused on the Dublin region, raising key questions about the Government's ability to deliver on its stated policy of developing a "knowledge economy" in the regions.

Enterprise Ireland statistics show the midlands, north-east and north-west were the worst affected regions for job losses in all sectors between 2001 and 2003. Dublin and the mid-east still dominate, accounting for 45 per cent of all supported jobs.

At Shannon Development's InnovationWorks centre in the National Technology Park in Limerick several firms cite infrastructure, particularly transport and broadband, as major issues.

"We do find that the status of Shannon Airport is a problem and commuting routes are poor," says Mr Colm Ward, chief executive and founder of Tango Telecom, a firm that develops software for mobile phone operators.

EUjet's decision to pull its planned new service between Shannon and Dublin will restrict local firms' ability to travel to Dublin and Europe even further.

Low broadband penetration outside Limerick and large towns is also a key regional challenge, according to Mr Eugene Brennan, industry marketing manager, Shannon Development. "This problem has been responded to in Limerick," he says. "But the outer regions still have a problem... we are devising satellite broadband solutions to meet some of these problems."

Similar bottlenecks exist in rural areas and small towns, but a Government scheme to build fibre in regional towns should begin to address this shortly.

Getting access to venture capital for firms outside Dublin is still a problem despite the launch of new regional funds by Enterprise Ireland in 2003. Last year 67 per cent of investments made directly by Enterprise Ireland or supported by its partner venture capital funds were Dublin-based.

The State agency and its partners invested €63 million in Dublin, €25 million throughout the rest of the State and a further €6 million in other EU regions.

A breakdown for the period between 1996 and 2003 shows that 71.4 per cent of all funding was allocated to firms in Dublin.

"It is much harder to get a successful company out of the mid-west than Dublin," says Mr Frank Roche, managing director of HomeNet Communications, a company based in Limerick that was founded in February 2000.

"If the venture capitalists have to come down here for a board meeting they have to spend a whole day whereas if they invest in Dublin they can get around two or three companies a day."

It is no surprise that there have been no Iona's or Baltimore's created outside Dublin because things are stacked against you, according to Mr Roche, who founded the firm, which supplies monitoring and surveillance technology to British police forces.

HomeNet Communications is now looking to raise €2 million funding but is more likely to seek a trade investor than attempt to raise money from the venture capital community in Ireland. "To make the jump from a €1 million company to €10 million a year you need someone to put through channel sales," he says.

Mr Mike Fitzgerald, chief executive of Altobridge, a software firm based at the Kerry Technology Park in Tralee, says it is still incredibly tough out there at the moment and there is a certain inability for venture people to really believe in new technology.

"At the moment venture capitalists are also only interested in ideas that have massive potential sales worth at least $100 million within five years," he says. "But it is almost impossible to find these types of companies in Ireland."

Altobridge, which develops software that enables mobile phones to work over extremely long distances using satellite technology, is now seeking to tap into US venture capital funds.

"Irish venture capitalists are not so forthcoming because they think that Co Kerry can't come up with a small Dell," says Mr Fitzgerald, who enjoyed considerable success when he sold his previous firm, Microcellular.

There are also signs that the State enterprise agencies and the venture capital community are becoming more cautious about investing in start-ups. In 2002 and 2003 Enterprise Ireland partner venture funds backed nine start-ups to the tune of €500,000, compared to a massive 72 initial investments worth €36 million in the previous two years.

"Firms are finding it more difficult to get seed funding due to the economic downturn," says Mr Pat Maher, executive director at Enterprise Ireland. "There is a higher risk at early stages... it is true to say that venture firms feel more comfortable investing in businesses located close by."

However, he says Enterprise Ireland has maintained its own funding during this period of economic decline and the agency is on track to support 65 young firms, the same figure as 2003.

The university infrastructure in regional centres such as Cork, Limerick and Galway is clearly a key resource to help create enterprises outside Dublin. But even in these relatively well served locations there is evidence of gaps in mentoring and funds available to entrepreneurs.

"I think Enterprise Ireland is still very much focused on the east of the country, and that is not discrimination but rather a geographical reality," says Mr Joseph Doyle, a senior researcher at the University of Limerick and founder of Glazejet, a company that has developed ink that can be sprayed directly onto glass.

Mr Doyle, who is attempting to raise funds that would enable him to commercialise technology that he developed at college, says there also needs to be more help from the State and university sector for academics who want to become entrepreneurs.

"I think there is a lack of a consensus about the willingness to accept risk and no one is stepping up to the plate... They are relying on academics to take a leap of faith with work they have done."

But despite the current problems developing new businesses outside Dublin, Enterprise Ireland's Mr Maher says the agency is continuing to invest and remains upbeat about the future.

"We are building 83 community enterprise centres in towns throughout the country and have another 33 on the way," he says.

"This programme and others will deliver about two million square feet of enterprise space and we hope this will transform the face of enterprise in Ireland... it is an act of faith in the regions."

In the first of a two-part series, Jamie Smyth investigates some of the difficulties of building a vibrant knowledge economy outside the Dublin area. Next week: how multinationals are faring, plus the impact of changing rules for the allocation of EU grants